Almost five million people are at risk of poor pensions choices, says NAPF

27th January 2015

Nearly five million people are at risk of making poor decisions because of the Government’s retirement reforms, the National Association of Pension Funds has warned.

The group has commissioned a new report entitled Understanding Retirement, which looks at the experience and concerns of people aged 50 – 70 both still working and already drawing a pension

The study identified three groups, which it has dubbed‘ Satisfied Sarah & Simon’, ‘Maggie & Malcolm in the middle’ and ‘Pinched Penny &Paul’ for easy reference.

The research report looks at their attitudes to retirement and considers how they may be affected by the Government’s new pension reforms, ‘Freedom & Choice’, which start in April this year.

Graham Vidler, director of external affairs, NAPF, said: “These reforms will directly affect approaching five million people in the next five years. There is very little time until freedoms start but there’s still a great deal of uncertainty about what people should do to make best use of the new pension reforms. The overwhelming majority of the people in the middle of these reforms tell us they want a secure income for their retirement but there’s currently no clear route for them to achieve this.

“For these reforms to give savers a chance to manage their pension savings effectively, savers need three things: awareness and understanding of the guidance they can expect; outline pathways to help them make the best use of their money throughout their retirement; and products that are easy to understand, reliable and good value. We want the Government and regulators to act quickly and work with us to ensure that ‘Freedom & Choice’ works well for everyone.”

Here are the categories that the research identified:

Sarah & Simon have worked for most, or all, their lives in roles such as a lecturer or teacher. Their average individual income when working is £37,520 and £30,000 when retired. They own and live in their home and typically have paid off the mortgage in full. On top of the State pension they also have a significant defined benefit pension through their employers. They have little or no defined contribution pension savings and so have a limited exposure to making unsuitable decisions about their pensions once the new freedoms are introduced. Sarah & Simon feel satisfied because their defined benefit pension provides them with the certainty and level of income they want or need in their retirement. Sarah & Simon are a shrinking group as defined benefit pension provision becomes less common.

Maggie & Malcolm have worked for most, or all their lives, in roles similar to that of a retail manager. Their average individual income when working is £30,000 and £20,000 when retired. They own and live in their home but typically still have some mortgage to pay off. On top of the State pension they have saved into defined contribution pension schemes, again mostly through their employers, and have very little or no defined benefit pension savings. Maggie & Malcom are in the middle of the two groups. Like Sarah & Simon they have significant private pension provision but unlike Penny & Paul they are not used to living on a tight budget and have saved into a pension to avoid having to do so in retirement. For Maggie & Malcolm the decisions they will now have to make under the new reforms carry the greatest risk / benefit. Maggie & Malcom now represent the largest group of non-retired 50-70 year olds at 4.8million. Looking ahead there will be many more Maggies & Malcolms than Sarahs & Simons as the shift from defined benefit to defined contribution pensions works through.

Pinched Penny & Paul have either worked for most of their lives in a factory or a similar job, or have spent limited time in paid employment due either to commitments as a carer or ill health. Their average individual income when working is £12,500 and £8,213 when retired. They do not own their own home but typically rent in the private market. Penny & Paul are used to living on a budget and while they have concerns about retirement the prospect of living on a budget is not unfamiliar. As they have little or no private pension provision beyond the State pension the pending reforms on accessing private pensions are of little relevance to them. Sadly, the number of Pinched Pennys and Pauls also looks set to rise as the cohort who missed out on a pensions reach retirement.

Which savers are most at risk of making poor pension choices?

Overall, Malcolm & Maggie view the pension reforms positively but admit they do not yet fully understand the reforms. Only one in three feel very confident about making a decision on what to do with their pension savings at retirement. The research indicates that most over 50 year olds who seek help with decisions on their retirement finances postpone doing so until they are close to retirement. 61% of working Maggies & Malcolms said they had not yet sought advice about their retirement finances as they feel comfortable making their own financial decisions. This percentage may reduce in time as the number of people who seek help with their finances increases as they approach retirement, but perhaps not as much as might be expected given that nearly half (48%) of the retired Maggies & Malcolms feel comfortable about making their own financial decisions and do not seek help. Although reluctant to seek help this group are still very clear about what they want in retirement: 82% of the retired and 78% of the working Maggies & Malcolms said they would rather have a secure income for their retirement than a pot to dip into as and when they need it.